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While a cut in excise duty that the central government levies will impact fiscal deficit, states like Bihar, Kerala, and Punjab are not in a position to cut sales tax (or VAT), said a government official.

Updated: Sep 10, 2018 20:22:10

By Press Trust of India

A security person guards at a petrol pump closed during the Bharat Bandh called against fuel price hike, in Coimbatore, Monday, Sept 10, 2018.
(PTI Photo)

A cut in taxes on petrol and diesel is ruled out for now as neither the central government nor some states have the appetite to stomach revenue loss from such a move, a top government official said Monday.

While a cut in excise duty that the central government levies will impact fiscal deficit, states like Bihar, Kerala, and Punjab are not in a position to cut sales tax (or VAT), the official, who wished not to be identified, said.

The government, he said, anticipates that international oil prices, which together with a drop in the value of rupee has been fuelling the fuel price rise to record levels, will moderate in coming days to take pressure off.

The comments come on a day when opposition parties held nationwide protests against record high petrol and diesel prices. Prices in Delhi, where rates are the cheapest among all metros and most state capitals because of lower VAT, saw petrol touch an all-time high of Rs 80.73 per litre Monday while diesel scaled to new high of Rs 72.83 a litre.

The official said consumers will have to pay for the fuel they use.

While Rajasthan on Sunday announced a 4 percentage point cut in VAT on petrol and diesel, Andhra Pradesh Monday said fuel prices will be reduced by Rs 2 each from cut in sales tax.

“A cut in oil taxes will add to the fiscal deficit. National fiscal deficit determines bond yield and with a higher fiscal deficit the rupee becomes shakier,” the official said. “Then (as a result of cut in taxes) you have to make budget cuts in developmental expenditure. This is the real consequence of oil tax cut.”

He said the government’s ability to give relief was only when its finances are strong. “States do not have the capacity to reduce rates,” he said.

A one rupee per litre cut in taxes would result in revenues being hit by Rs 30,000 crore on an annualised basis.

“Oil prices disturb your CAD,” he said adding oil companies will not be asked to take a hit for now as users should pay for the utility they use.

“We will be able to lower taxes when we are able to increase compliance on income tax and GST. Till then dependence on oil will continue,” he said.

Fuel rates have been on fire since mid-August, rising almost every day due to a drop in rupee value and rise in crude oil rates. Petrol price has risen by Rs 3.65 a litre and diesel by Rs 4.06 per litre - the biggest increase in rates witnessed in any month since the launch of daily price revision in mid-June last year.

The official said every state collects VAT and also gets 42% of what Centre collects.

Almost half of the fuel price is made up of taxes. The Centre levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. On top of this, states levy Value Added Tax (VAT) - the lowest being in Andaman and Nicobar Islands where a 6% sales tax is charged on both the fuel.

Mumbai has the highest VAT of 39.12% on petrol, while Telangana levies the highest VAT of 26% on diesel. Delhi charges a VAT of 27% on petrol and 17.24% on diesel.

The central government had raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47 a litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 a litre.

This led to its excise collections from petro goods more than doubling in last four years - from Rs 99,184 crore in 2014-15 to Rs 2,29,019 crore in 2017-18. States saw their VAT revenue from petro goods rise from Rs 1,37,157 crore in 2014-15 to Rs 1,84,091 crore in 2017-18.

“Our analysis shows that crude oil prices do not move in a straight line. Some months it goes up and some months it comes down,” he said. “Bringing oil in GST is not a solution. The only way taxes on oil can be brought down is by increasing non-oil tax-GDP ratio.”

The tax ratio can be raised not by increasing rates but by bringing evaders and non-filers in tax net. “2007 was the only year when we saw an increase in tax-GDP ratio. 2008-2014 it was static,” he said.

From 2014-18, there was an increase of 1.5% in tax-GDP ratio. Of this, 50% is non-oil and 50% is oil. Next 5-6 years the target should be to increase non-oil tax to GDP ratio by at least 1.5% and this is the long-term solution, he said.

In countries which are tax compliant, oil is taxed at a rate which is less than that in India. “If we expand the tax base in the same proportion as we did last year then non-oil GDP ratio will go up,” he said.

Giving an example, the official said if petrol is at Rs 83, then Rs 20 goes to states as taxes plus Rs 10 from Centre’s devolution. So states get Rs 30 out of Rs 42 collected as taxes.

Also, states levy VAT and this has increased their profits. The extra benefit accrued to states is Rs 3-4 per litre, he said.

“We have given income tax relief to the tune of Rs 98,000 crore and also Rs 80,000 crore on account of GST rate cuts on 334 commodities,” he said. “The effect of this benefit has kept inflation under control despite rise in fuel prices. Inflation was 4.1% in Vajpayee government, 5.8% in UPA-1, 10.4% in UPA-2 and in current NDA around 4.5% average.”

The official said the four states which have supported Bharat Bandh collect high taxes themselves.

Andhra Pradesh gets Rs 22.15 per litre on petrol and Rs 16.87 on diesel. Karnataka gets Rs 18.88 on petrol, Rs 12.23 on diesel, Kerala Rs 19.09 on petrol and Rs 14.51 on diesel and Punjab gets Rs 21.81 per litre in taxes on petrol and Rs 10.07 a litre on diesel.

While fiscal deficit means expenditure higher than income, current account deficit (CAD) is the difference between inflow and outflow of foreign currency.

In an election year, the spending cut is not an option, the official said reasoning that it would hamper the government’s spending on development schemes.